Question

Using the IRR technique.

Define the technique.

Discuss the difference between this method and the payback method, discounted payback method, and NPV method.

Remember to carry out your answers at least two decimal places.

Year	Project A	Project B	Project C
2018	($3,000,000)	($3,000,000)	($3,200,000)
2019	$0	$975,000	$985,000
2020	$600,000	$975,000	$925,000
2021	$900,000	$975,000	$1,000,000
2022	$3,000,000	$1,000,000	$950,000

The projects are discounted at 10% rate
		Project A
Year	Cash flows	Present Value Factor( C (1.10)-n)	Present Value
2018	($3,000,000)
2019	$0	0.9091	0
2020	$600,000	0.8264	495,867.77
2021	$900,000	0.7513	676,183.32
2022	$3,000,000	0.683	2,049,040.37
Total			3,221,091.46
Project B Year Cash flows Present Value Factor( C (1.10)-n)   Present Value 2018 ($3,000,000) 2019 $975,000 0.9091 886,363.64 2020 $975,000 0.8264 805,785.13 2021 $975,000 0.7513 732,531.93 2022 $1,000,000 0.683 683,013.46 Total 3,107,694.16 Project C Year Cash flows Present Value Factor( C (1.10)-n)   Present Value 2018 ($3,200,000) 2019 $985,000 0.9091 895,454.55 2020 $925,000 0.8264 764,462.81 2021 $1,000,000 0.7513 751,314.80 2022 $950,000 0.683 648,862.78 3,060,094.94 NPV= $3,060,094- $3,200,000 = $-139,905.06 NPV= 3,107,694.16- 3,000,000= $107,694.16	NPV = $3,221,091.46-$3,000,000= $221,091.46

Answer 1

Calculation of IRR using excel formula

Year	Project A	Project B	Project C
2018	($3,000,000)	($3,000,000)	($3,200,000)
2019	$0	$975,000	$985,000
2020	$600,000	$975,000	$925,000
2021	$900,000	$975,000	$1,000,000
2022	$3,000,000	$1,000,000	$950,000
IRR	12.27%	11.64%	7.96%

excel formula of IRR "=IRR(values i.e. select cash flows for years 2018 to 2022, leave the guess blank)

Internal rate of return (IRR) is a discount rate at which cash inflows and outflows be equal. It provides a net value of zero for a future series of cash flows and can bring an investment's NPV to zero.

IRR is the interest yield as a percentage expected from an investment whereas NPV is a return generated from present value of cash inflows above the present value of cash outflows. NPV will be positive or negative depending on the cost of capital but IRR will make the NPV zero.

Payback period tells that how much time a project will take to return initial investment of the project. It simply gives the time required to earn back the initial investment but it doesn't consider the time value of money.

Discounted payback period also gives the time required to get back the initial investment but it considers the time value of money also. in discounted payback period calculation, discounted cash flows are used whereas in payback period calculation normal cash flows are used. in discounted payback calculation, cost of capital is ued to discount cash flows.

Please let me know if I missed something from answering or you need any clarification.